China Buys Gold as Trade Wars Escalate

Precious Metals Commentary

Gold added $10 per ounce this week, rallying back above USD$1,280 and has managed to successfully hold above the trendline from September 2018. Silver is slightly higher than last week at USD$14.80.

Gold in the short term looks bullish above this trendline – keep an eye out over coming weeks to see if we can break out of the range seen in the daily chart below.
 

Despite the RBA keeping rates on hold, the AUD/USD failed to hold above 0.70 US cents as market participants are most likely thinking a cut is still inevitable and most likely within a few months. So gold in AUD is trading higher at $1,837 and silver at $21.20.

As expected, palladium has continued lower in recent weeks and now trades just above USD$1,300 per ounce, some $300 off the recent overbought peak. Platinum is looking steady at USD$860.

The biggest headline in financial markets today is the escalation once again of US-China trade wars. Unless a deal is struck in the meantime US tariffs on some Chinese goods are poised to rise from 10% to 25%, unless of course Trump is bluffing.

We can expect some market volatility to occur over the next few days so we could see some larger sized moves in precious metals as well as FX and equity markets tonight, with the general assumption that if indeed the tariffs are imposed, it’ll be fair to say that US equities will get smacked lower from an excessively high level and gold should catch a bid.

One can see the S&P 500 below as it barely clings to the 50 day moving average, with the last time it failed through this level the market sold off in dramatic fashion. Expect some fireworks if Trump holds aces, but if he’s bluffing, a relief rally in equities will no doubt occur.
 

Rates on Hold, for Now

The RBA decided to hold on interest rates this month. Maybe they didn’t want to be seen to have an impact on the election but a strong Australian labour market and a “reasonable” outlook for the global economy were mentioned. The RBA did note some negatives for the economy, including an euphemistic “adjustment in established housing markets is continuing” - below is what an “adjustment” looks like in chart form, worst figures in over ten years.
 

The RBA also lowered its 2019 forecast for gross domestic product to 2.75%, which is down quite a bit from the forecast of 3.5% it made last year. They also dropped their 2019 inflation forecast to 1.75% but they don’t have a good track record on that, as this chart from AMP demonstrates.
 

While Australia recorded another trade surplus in March, Business Insider drilled into it and found that it has not just been higher booming commodity prices helping exports, but “weakness in consumer imports, providing another indication that household demand remains weak”. This was confirmed by service sector firms reporting tight consumer discretionary spending and employment and wages growth going backwards in April. No wonder Roy Morgan reported another drop in their business confidence index to a near four-year low.
 

These factors are no doubt contributing to the fact that “as many as 5 per cent of homes slumped into negative equity in March” according to ANZ on Radio National, and we expect this number to grow moving forward.

The situation is no better in the US, with Equifax’s annual Financial Literacy Survey saying that “nearly half of surveyed adults indicated they do not have enough savings to cover at least three months of living expenses” with 35% saying they aren’t saving for retirement. A report from National Institute on Retirement Security found that nearly 60% of all working-age Americans do not own assets in a retirement account.

Australians in general would be better off given our compulsory super contribution system. However, unless investors have some allocation to gold, either by regular gold saving or via our superannuation partners, they may not be protected if we see another significant bear market in equities. While rates may be on hold for now, experts still see the RBA dropping them later this year and they may go negative, if the International Monetary Fund (IMF) has its way.

To Zero and Beyond

The IMF has noted that central bankers typically cut interest rates by 5% to 6% during recessions. However, with interest rates in many countries close to zero, this does not give them enough room to cut as it has been considered difficult to cut rates below zero because people could just withdraw physical cash from the bank to avoid having to pay to keep their money in digital form.

The IMF, maybe taking inspiration from its namesake the Impossible Mission Force (cue Tom Cruise), has recently provided a handy guide for its 189 member countries on how to enable deep negative rates (emphasis, deep), saying that zero need not be a bound(ry). What is noteworthy about the release of this document is that it indicates that in central bank circles, negative rates has moved from a “should we do it” discussion to “how do we do it”.

While the idea of paying to hold money, or even paying people to borrow money, may seem absurd, the IMF sees deep negative rates as “critical for central banks to maintain effectiveness of monetary policy in the future and will help mitigate the hardships associated with prolonged recessions”. At least they are explicit that lower interest rates “work” because they favour borrowers at the expense of lenders (i.e. savers) as borrowers are more likely to spend any reduction in their loan repayments. Seems like a one-sided hardship mitigation.

In additional to setting a lower exchange rate between paper and digital currency (e.g. when depositing $100 cash in a bank, you only get $98 credit to your account), which is the IMF’s preferred approach, they discuss other methods of enforcing negative interest rates including:

• Cash withdrawal limits or limits on cash deposits

• Purposely keeping low inventory of cash in bank branches

• Banning storage of paper currency as a business

• Putting restrictions on flows of paper currency in and out of the country

• Retiring large denomination notes

• Abolishing paper currency outright

If you think this all sounds unlikely, governments have shown a willingness to consider similar measures. The Federal Government is still pushing forward with its $10,000 cash payment limit to commence on 1 January 2020 (delayed from 1 July 2019). In China, banks have quietly lowered the daily limit on foreign-currency cash withdrawals, and in 2016 India demonetised banknotes in an attempt to break the black market and get Indians to switch to bank accounts.

Negative interest rates would be highly favourable to gold, as well as other hard assets like property or art, as people attempt to “save” in goods that would not depreciate. Businesses would be incentivised to run bloated inventories rather than hold any bank balances. The risk is that such actions could result in runaway inflation but many consider this unlikely and have confidence that central bankers could arrest such a development.

China’s Golden Appetite

With the recent ramp up in trade war commentary it appears that we are once again moving towards a more confrontational geopolitical environment. This is obviously favourable for gold as central bankers (particularly China’s PBOC) look to diversify away from US dollars.

Historically, China has not published gold trade data even though it did so with other commodities. So analysts had to develop their own proxies to track China’s import appetite. In a recent article published in the LBMA’s Alchemist magazine, former Macquarie bank strategist Matthew Turner highlighted that this has now changed, and used the new transparent data to compare previous Chinese import estimates (via a ‘mirroring’ method) to actual directly reported figures.

Matthew’s mirroring method estimated China’s gold imports by looking at what other countries reported exporting into China, and the comparison can be seen in the below chart.
 

Previously, Hong Kong appeared to be the source of most of China’s gold imports, but it was only ever just a transit point. The new figures reveal the significant role Australia plays, and how important China is as a customer considering the circa 250 tonnes that flows to them relative to Australia’s total gold production of over 330 tonnes.

We can see from the above that the biggest suppliers are Switzerland, followed by Australia, and the big difference for Hong Kong data to the previous method is that China’s customs methodology reports the original source of the imported bar, rather than where it last came from.

Also significant is China’s reported imports via the new ‘direct method’. China imported a whopping 1,270 tonnes of gold in 2017, and then in 2018 this increased even further to 1,506 tonnes.

We see China’s demand for gold to be a major tailwind for supporting precious metals prices moving forward, particularly if we see further escalation of trade wars increasing PBOC’s appetite for a much more solid alternative to US Dollars.

The ABC Bullion National Conference 2019: A Global Case for Gold

We are excited to announce that the ABC Bullion National Conference 2019: A Global Case for Gold will be held on Tuesday 20th August 2019 at the Ivy Ballroom in Sydney.

Our conference aims to bring together bright minds that are leaders in our industry to present on a wide range of precious metal subjects, to foster learning, inspiration and education – and provoke conversations that support the gold industry in Australia whilst opening our eyes to the global economic factors which drive the gold price.

The ABC Bullion National Conference will be hosted by Nick Farr-Jones and features keynote speakers:

• James Rickards – renowned American lawyer, speaker, economist and author on matters of finance and precious metals

• Jake Klein – Executive Chairman of Evolution Mining - one of Australia’s largest gold producers

• Precious Metals Round Table – discussing the macroeconomic background and implication for precious metals prices

Canapés and refreshments will be provided on the night. This event will be a great opportunity for you to network with our industry experts and other precious metals investors. This year’s conference is expected to sell out fast and is not one to be missed!

Tickets and further details will be announced soon. To register for early bird tickets, click the button below:

Until next time,
 
John Feeney and Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.

Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.